India’s exchange rate has depreciated more than 13% so far in 2018, exceeding its earlier fall of 12% during the market turmoil of 2013. Does that mean that we are worse off now than at that time when the country was clubbed together with the fragile emerging economies?
Before answering the question, let us examine what was similar and what is different then and now.
In some parameters, the two episodes have striking similarities. Both episodes were triggered by the sudden hostility of investors towards emerging markets. The exchange rate was at the heart of the meltdown both times. The collateral damage was the bond market five years ago and it is suffering even now.
The adjoining chart shows how different markets behaved in the two episodes of meltdown. The market behaviour eerily resonates with what happened during 2013. The change in crude oil prices does not seem high in 2013; note that crude oil was already more than $100 a barrel back then.
While India was among the fragile five at the time, its currency wasn’t the worst performer. Fast forward to today, and the rupee is among the weakest performers in Asia.
There is some merit in the view that the two periods of turmoil are different. And the difference is not the fact that India is now a stronger economy with a large forex reserve stockpile as a shield. Five years ago, the bright spot of India was the dollar inflows into its equity markets. This year, foreign fund outflows have been massive.
One of the stark differences is how policymakers behaved in India. During the taper tantrum of 2013, the Reserve Bank of India (RBI) went beyond the usual to tackle a falling currency. It tightened liquidity with new measures almost every month between May and July so that the premium of the rupee increases. The central bank even resorted to capital controls by curbing the amount Indians could remit abroad. These measures, though salutary for the currency, conveyed the message that RBI had lost control over markets.
This time around, RBI has restricted itself to just basic intervention in the forex market and its measures on easing dollar borrowings have been in line with expectations.
Not surprisingly, the markets have reacted the same way, disregarding any salve. Perhaps the only way for policymakers is to ride out the storm.